Is diversification the key to recession survival?

Josh Hall

News by Adfero for Simply Business

An important result of the recession has been the sucking of profit from
otherwise lucrative, or at least sustainable, niches. Specialised
businesses which were successful during the good times are now finding
themselves squeezed, plugging away at a revenue stream that no longer
exists.

The business organisation claimed that an inability to diversify meant
SMEs would be affected by a downturn to a greater degree than larger
organisations, which are more likely to be spread across a number of
sectors.

Reiterating the CBI’s message, Chris Simpson, account manager for
government business support service Business Link said that
“looking at diversification” could help a business through tough
economic times.

Of course, diversification can be a boon for businesses in any economic
climate. By extending the range of services on offer, a company can
often increase its revenue from existing customers or expand into new
markets.

In addition, by building on an existing brand name and bank of contacts,
new ventures already have a head-start.

New offerings

Diversification can focus on related products - for
example easyJet’s line of budget hotels to complement their budget
airline business. Or it can test a brand's strength in new areas, as
Virgin did when it added its media outlet to its well-established
airline brand.

The service was offered as part of the company’s marketing product
suite, but was given its own identity to boost sales.

Talking to Growing Business, Mr Bentley said diversification did
not have to mean “brand new”, arguing that “if you have got something
strong, build upon that”.

Highlighting the benefits of diversification, he added: “You’ve
already got your accounts, human resources and other departments in
place to cope with the new business. You don’t need to put in all the
administration like you do when you’re getting a new business up and
running.”

Diversification risks

Expansion is not without its associated risks,
however. Diversifying during tough times - for example when demand is
low or finances are tight - can act as a distraction from ensuring that
the core business is stable and profitable.

That said, it is important to be sensitive to movements in your sector.
You must be able to promptly identify when the market for your existing
products or services is set to decline, or if it is already saturated.
In these cases, diversification can be a useful means for business
survival.

Thorough market research is also a vital component in any business
diversification strategy. Without understanding a new market, gaining
expertise in that area and knowing the competition, a new venture is
unlikely to take off.

Adrian Mole of accountancy and business adviser Mazars claims a
lack of research is one of the most common reasons for the failure of a
diversification strategy. He told Growing Business: “Mostly this
happens at a commercial level when the entrepreneur hasn’t fully
understood the business that they are going into.

“The classic one is haulage. People think that because they have a
fleet they can become a haulage company without realising the issues
involved and that many hauliers are working on wafer thin margins."

For these reasons, Business Link advises that expansion into related
markets with a familiar customer base is less risky than entry into
completely new markets.

The organisation also recommends that a clear development strategy is
put in place, with new products and services tested for a trial period
before a permanent roll-out.

Staff

For small businesses in particular, staffing considerations can
be key. It is vital that the staff and suppliers are in place to offer a
new product, and that sales and marketing teams are able to promote it.

This is one area in which Greg Harris, development officer for Mitchell
Charlesworth accountants, believes his company could have done
better when they launched their small business development service.

He told Business Link: “We should have included internal training as
part of the diversification process from day one. The business
development service took off so quickly that we needed more trained
staff to help us cope at a very early stage.

“If we’d developed the skills of existing employees sooner, we
wouldn’t have had to recruit from outside the company. It was more
expensive in the long run.”

Some final key areas that are often overlooked by diversifying
businesses are tax and insurance. It is useful to inform the Inland
Revenue of any changes to a business model. If diversification leads to
a new business setup this may result in a change to a company’s tax
status.

Diversifying businesses also need to ensure that they have the correct
insurance in place to cover the activities of new ventures, and should
not assume that existing policies will cover this.

So while diversification can be a welcome boost to a business in the
tough economic climate, well-planned diversification has a far greater
chance of long-term success.